Idea that can sell web ads wins economics Nobel

Economics Nobel Prize winners Lloyd Shapley (left) of UCLA and Alvin Roth of Stanford University developed a theory that can be used, among other things, to help patients in need of an organ transplant or internet search engines which auction space for advertisers.
Photo: Reuters

US scholars Alvin Roth and Lloyd Shapley have won the Nobel Economics Prize for work on how to best match supply and demand, with applications in the fields of organ donation, education and the internet.

The two were honoured for "the theory of stable allocations and the practice of market design," the Nobel jury said.

Their work can be used to help match donors of human organs with patients in need of a transplant, or students with universities, or internet search engines which auction space for advertisers.

Roth, 60, is a professor at Harvard Business School in Boston, Massachussets, while Shapley, 89, is a professor emeritus at the University of California.

Roth told public broadcaster Swedish Television he was surprised to win the award.

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"No it wasn't expected. But it is certainly expected that Lloyd Shapley won the prize ... I'm glad to share it with him," he said.

Roth said he was pleased that the prize would "shine a very bright spotlight on the work" he and Shapley had conducted in market design, "a newish area of economics, and when I go to class this morning my students will pay more attention."

In choosing market design theory for this year's prize, the Royal Swedish Academy of Sciences avoided wading into a heated macroeconomic debate over fiscal policy, austerity measures and stimulus packages.

"We neither try to pick topics that are the subject of much debate, nor do we try to avoid them," Per Krusell, chairman of this year's Economic Sciences Prize Committee, told AFP.

"This year's prize just happens to ... not have any connection whatsoever, that I can see, to the financial crisis."

Roth and Shapley worked independently of each other but "the success of their research is due to the combination of Shapley's theoretical results with Roth's insights into their practical value," the committee said.

Resources are often allocated through a pricing mechanism: high oil prices give consumers an incentive to conserve energy, and high wages attract workers to a particular profession.

But in many markets, pricing is not enough to match different agents. Money is not the only factor that decides which hospital a doctor wants to work in, or which university would be best for a prospective student.

Central to Shapley's and Roth's work is the idea of stability: the allocation whereby no individuals perceive any gains from further swaps, or trade.

In a 1962 paper, Shapley applied the idea of stability to that of marriage. How could individuals in a group of people be paired up when they all had different views on who would be their best match?

The best match-making was achieved by using what is now known as the Gale-Shapley "deferred acceptance" algorithm, a set of rules which aim to achieve a stable solution.

This year's award confirms the US dominance in the Nobel Economics Prize. Of the 20 laureates who've won in the past 10 years, 17 are Americans, including two Israeli-Americans.

Roth and Shapley will receive the prize, consisting of a Nobel diploma, a gold medal and 8.0 million Swedish kronor ($1.17 million) at a ceremony in Stockholm on December 10, the anniversary of Swedish industrialist and prize creator Alfred Nobel's death.